Turning 40?It Is Time For Some Smart Financial Moves

The late 30s to early 40s is a significant phase in one’s life. One is about to reach his career peak and would have already bought a home and probably paying EMIs. Most importantly, children would still be growing up. Professional life would be demanding, but he has to find time for the family. Even as other financial goals require to be fulfilled, he would need to focus on a sound retirement plan, which is due in another 20 or a few years more. A wrong financial choice, at this stage, may turn out be damaging in years to come.

Shikhar Kapoor, 40, hotelier, angel investor and serial entrepreneur, stays in Noida with his wife, Aanjulie Kapoor, 37, Vaastu and FengShui consultant, and their six-year-old son Atharv. “I started my entrepreneurial journey at the tender age of 24 and have seen a lot of struggle, but now things are quite smooth,” he says. Since Atharv was born, several things have changed for them. “Many of our friends work for corporates and they hardly find time for their children. For us, our child and his future is our priority,” Kapoor adds. Since both of them manage their separate businesses, their saving plans don’t work like salaried  couples. “We have a fluctuating income, hence try to save the maximum we can,” he informs.

Surat-based businessman Sanjeev Bhatia, and his wife, Hema Bhatia, both 39, similarly want to ensure that their children, aged 13 and seven, receive good education. On the other hand, Bhatia, owner of onlymobiles.com, an online mobile store, and a chain of mobile retail stores, is looking to expand his business, which requires a substantial amount of investment. “I have it planned out. I allocate 30 per cent of my income to meet my regular expenses, put back 40 per cent into the business and invest the rest 30 per cent,” he says. These investments help him to meet his short-term and long-term goals.

Another middle-aged couple Deepak, 41, and Purnima, 38, Daftari live in Kolkata with their children, aged 12 and six. Daftari, a domaineer and angel investor, prioritises family over everything else. Since most of his clients are from the US and the UK, he often has work late in the night. “But, I do not want to lose out on their childhood,” he asserts. A doting father, Daftari makes it a point to come back home and spend some quality time with his family before getting back to work later in the night. Meticulous about his finances too, he made a sound retirement plan, he says, “After taking care of all my financial responsibilities, I want to have a healthy corpus in hand to enjoy a nice and comfortable life and travel around the world.”

People running their own businesses should always keep their personal and business accounts separate. Since entrepreneurs tend to invest most of their income back into the business, it makes sense to make separate investments in liquid asset classes. Business money is never liquid money. Anant Ladha, Founder, Rajasthan-based Investaajforkal, a financial advisory firm, says that people in business should project a minimum cash flow and start investing in small SIPs. As and when there is an extra cash flow, they can take out some money and make a lumpsum mutual fund investment.

Multiple Goals

Ladha explains, at this juncture, children’s education and saving for their marriage become major priorities and eat up a lot of finances. At the same time, one needs to focus on a solid retirement fund. “It is important to set a personal target and decide on monthly savings to achieve that,” says Ladha. Moreover, it is important to distinguish between needs and aspirations. For example, having a luxury car is an aspiration but a retirement goal is a need. “An investor should first focus on needs and then plan for their aspirations. Different funds should be allotted to reach different goals. This will ensure that each goal is well taken care of,” Ladha adds.

Kapoor does not drive a fancy car even though he can afford one. “My priority is to fulfil my needs first, as wants have no end. I also believe that one should not invest in depreciating assets,” he says.

Bhatia, at his end, has finely divided his entire financial portfolio into three categories – short-term (usually six to 24 months), medium-term (two to five years) and long-term (more than five years). For this, he allocates 20 per cent, 30 per cent and 50 per cent funds respectively. His short-term investments are mostly liquid instruments. For medium to long-term goals, he invests into mutual funds and commercial properties.

Health and life insurance

Ladha suggests a need-based approach to life insurance. One should calculate the needs of the family members, in terms of daily expenses, loans, children education and saving for their marriages, to arrive at an amount that would be sufficient for the family to survive in case of death of the earning member. . From this figure, the existing life insurance and assets (not including home and car) need to be deducted. Accordingly, a new term-plan should be bought which would cover the existing gap.

Speaking on health insurances, Hina Shah, owner of Mumbai-based financial planning firm LUHEM, recommends a basic health insurance policy of `five lakh for each member of the family plus a top-up floater of `10 or `15 lakh, which covers the entire family. A top-up policy comes with a deductible that is equal to the basic cover that the person has. If the medical expenses for a year exceed the basic insurance cover, then the top-up plan can be availed.  Bhatia has a life insurance of `35 lakh and a medical cover of `15 lakh. While his health insurance plan seems sufficient, he would need to boost his life insurance. Kapoor and Daftari, meanwhile, are yet to get their medical insurances and already in their 40s, they should get it at the earliest. As a matter fact, getting a health insurance till 45 is easy – “you just need a medical  checkup,” says Prakash Lohana, Chief Financial Planner and MD, Ascent Financial Solutions, Vaododara. Lohana, however, warns, “One should read the features of the policies properly, as some policies have internal capping.”

Children’s Education

If the goal of higher education for your child is still five to 10 years or more in the future, SIPs are the way to go.  “A step-up SIP is the best way to plan for this,” says Shah. It makes sense as you can add to the SIP amount every year on the basis of the increase in your income. Also, it means that you can start off small and then boost your SIPs as time progresses, rather than starting off with a higher amount. However, if the goal is only a few years away, one should encourage his children to take up an education loan, which the latter can start paying off once they start earning. “One should not use the savings from the retirement account to fund child’s education,” Shah further adds.

As young parents, Bhatias have their priorities clear. They explain that their children are still too young to understand what they want from life. “However, as parents, we want to ensure that they get the best education,” says Bhatia.

Similarly, Daftari invests separately for his retirement and for the education of his children. “It is  an ongoing process and I will continue to invest in these funds  till they are 21,” he says. Kapoor, similarly, invested in real estate for his child’s education goal.

Retirement, a priority

As the Indian government does not provide social security, one should focus on a retirement plan from an early stage. “One should start with a 15 to 20-year vision and plan the assets accordingly and slowly keep adding to it., ” says Ladha ” Ladha further explains that initiating a long-term goal seems difficult. “But once you start off, you feel comfortable.”

As a retirement plan, Daftari’s investments are spread across fixed deposits, equities, national saving certificates, real estate, gold, silver, digital assets and secondary investments in companies. “I prefer investing in direct equities over mutual funds,” he says.

Being debt free 

Most importantly, paying off one’s liabilities, including home loan, before retirement is very critical. “Post-retirement, as there is no regular inflow, having liabilities can cause a lot of trouble. Hence, it should be ensured that such loans are repaid before one reaches 55,” says Ladha. Kapoor, Bhatia and Daftari own houses and have no outstanding EMIs. However, in case one has a home loan, it is important to pay it off as soon as possible.

Shah suggests that one should increase the EMI amount every year by a certain percentage to pay back the loan earlier. One should regularly check with the bank, if it has reduced the rate of interest and in such a case, it may offer either a reduced EMI or a reduced tenure. It also makes sense to check with other banks and see if they are offering a lower rate of interest. One may consider transfering the loan to the other bank too.

As they say 40s is the new 20s and with a proper planning it could turn out to be another joy ride ahead.

anaghpal@outlookindia.com